Exam 18: Liability and Liquidity Management

Michelle has maintained an average balance of $300 per month for the first three months of the year,$800 per month for the next three months,and $1,000 per month for the final six months of the year in a NOW account.It requires a minimum balance of $500 to be maintained if annual interest of 5 percent is to be earned.She writes an average of 25 checks per month but the account does not have a service charge for checks although it costs the bank 10 cents to process each check. What is the average return (explicit and implicit)earned by her if the bank pays interest only on the amounts in excess of the required minimum of $500?

Which of the following is considered to be the most liquid asset?

Under contemporaneous reserve accounting,there is a seven day reserve maintenance period.

In most countries,assets used to satisfy the liquid assets ratio may include liquid government securities.

The advantage to a lender in a repurchase agreement transaction versus a fed funds sale is the collateral of government securities or other acceptable liquid assets provided by the borrowing FI.

Because investment banks typically buy and sell securities on a regular basis;they have no need for a liability management plan.

Which of the following is a mechanism used by DI managers to impact withdrawal rates of NOW accounts?

The DI can influence the withdrawal rates of NOW accounts through explicit interest payments,implicit interest payments,or minimum balance requirements.

Which of the following rankings of liabilities is correct if they are ranked by funding costs from lowest cost to highest cost?

Michelle has maintained an average balance of $300 per month for the first three months of the year,$800 per month for the next three months,and $1,000 per month for the final six months of the year in a NOW account.It requires a minimum balance of $500 to be maintained if annual interest of 5 percent is to be earned.She writes an average of 25 checks per month but the account does not have a service charge for checks although it costs the bank 10 cents to process each check. What is Michelle's annual gross interest return?

In most countries,regulators often set minimum liquid reserve requirements on FIs.

In situations where the required reserve shortfall exceeds 4 percent,the bank may be

Since 1998,interest rate variability in the fed funds market has decreased because

Fed funds are subject to settlement risk,but have little or no early withdrawal risk.

The Federal Reserve allows the DI to make up to a _____ daily average error without penalty.

One method of reducing the risk of a liquidity crisis for an FI to efficiently manage liquid asset positions.

Passbook savings accounts normally receive a lower interest rate than NOW accounts.

The increased securitization of bank loans has reduced the liquidity of bank assets.

Requiring minimum reserves to be held at the central bank is the equivalent of

The following demand deposits and cash reserves at the Fed have been documented by a bank for the computation of reserve requirements (in millions). Note that reserves are vault cash and reserves at the Fed. -What is the average daily reserve required to be held by the bank for their demand deposits during the maintenance period? Suppose that the rules require no reserves for the first $14.5 million,3 percent for amounts between $14.5 million and $103.6 million,and 10 percent thereafter.